Pension - Plan Asset Portfolio (2012 AM)

CFA Level III
#1

Estimated components of the plan’s benefit payment

  • Retirees 35%

  • Deferred 10%

  • Active accrued 40%

  • Future wage inflation 10%

  • Future real wage growth 5%

The plan was changed to no longer offer inflation-adjusted payment to new retirees. (No effect to deferred)

Q: Using ALM approach, which asset class should have the highest weighting in the pension portfolio?

A. Nominal bond

B. Equities

C. Real-rate bonds

Justify with one reason.

#2

Nominal ?

#3

Answer is C. retirees + defferds + real wage growth =55% so they must have real bonds even the plan are no longer have new participants and current lives linked to inflation